In a victory for companies seeking to raise money with full public advertising and low investor requirements, the SEC just released its final rules on Reg. A+ offerings. The rules will go into effect 60 days after they are published in the Federal Register. That will likely be early June. (The SEC is not expected to issue final rules for crowdfunding under the JOBS Act until October of this year.)
The new rules give companies two approaches. Tier 1 covers offerings of up to $20 million and Tier 2 covers offerings from $20 million to $50 million (plus smaller offerings if the company elects to use the Tier 2 approach).
Both types of offerings must be approved by the SEC in advance. In addition, Tier 1 offerings must be approved by each state where the company wants to have investors. (More on this below.) The major advantage of Tier 2 offerings is that they are exempt from state approval.
Tier 2 offerings also have other restrictions and requirements, though. Tier 2 issuers are required to include AUDITED financial statements in their offering documents. Tier 1 issuers do not have to have their financials audited. Tier 2 issuers also must file annual, semiannual, and quarterly reports with the SEC. (These filings are still less onerous than the usual “reporting company” requirements.) Tier 1 offerings require a filing when the offering ends, but no ongoing filings. Still, a Tier 2 issuer can exit the reporting requirements any time after completing reporting for the fiscal year in which the offering was approved.
Also, Tier 2 investors (but not Tier 1 investors) must either 1) be accredited or 2) invest no more than (a) 10% of the greater of annual income or net worth (for natural persons); or (b) 10% of the greater of annual revenue or net assets at fiscal year end (for non-natural persons). Given that there is no limit on the number of investors, though, the 10% restrictions should not pose a significant barrier.
As for Tier 1 offerings and state approval, the North American Securities Administrators Association (“NASAA”) now has a coordinated review plan for state clearance of Reg. A offerings. A single application is submitted where the issuer indicates the states where the issuer wants to have investors. One caution is that each state has its own Reg. A filing fees, which can range from $200 to $2,500. For this reason, an issuer probably wants to limit the states it selects to those where it believes it has a good chance of getting investors.
The application goes to the State of Washington. It selects two examiners, one for merit (fairness) review and one for disclosure (completeness) review. Within 10 business days after their selection, the examiners draft and circulate a comment letter to the selected states. The states have 5 business days to submit additional comments. If a state does not submit comments within that time, the lead examiners can assume the state has no comments. The examiners then have 3 business days to make any revisions and send the comment letter to the issuer. Once the issuer responds (with changes or challenges) the examiners must respond within 5 business days. Of course, there can be several rounds of communications. Once the two examiners approve the offering, the participating states agree to approve it as well.
For many companies, the new Reg. A+ rules will compare favorably to Rule 506c offerings. Although Rule 506c offerings allow full public advertising, only accredited investors are allowed – and they must provide some documentary evidence that they are accredited. A number of companies have found that potential investors are very reluctant to provide that evidence, and that the requirement that all investors be accredited greatly limits the possibilities of raising money.
Bruce E. Methven
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